What is lenders mortgage insurance?
Lenders mortgage insurance is a one-off premium paid by borrowers when their loan-to-value ratio exceeds 80%, protecting the lender against default risk rather than the borrower.
Lenders mortgage insurance (LMI) protects a mortgage lender's interest when a borrower has not saved a 20% deposit. It is triggered when the loan-to-value ratio (LVR) exceeds 80%, meaning the borrowed amount is more than 80% of the property's purchase price.
The borrower pays the LMI premium as a one-off cost, usually added to the loan amount or paid upfront at settlement. This is not an ongoing insurance policy. The premium protects the lender if the borrower defaults and the property's sale price does not cover the outstanding loan balance. LMI does not protect the borrower or provide them with cover.
LMI is common for first-home buyers and investors who have smaller deposits. The premium amount varies based on the LVR, property type, and lender requirements. Mortgage brokers in Perth can help borrowers understand when LMI applies to their situation and discuss options to minimize costs, such as saving a larger deposit or exploring first-home buyer programs that may reduce LMI requirements.
Once the property value increases or the loan is paid down so the LVR falls below 80%, the borrower can request LMI be removed, though it remains a one-time expense rather than an ongoing monthly cost.